A couple of days ago, Rick used the term 'Black Swan Event' in the comments so I asked him to expound on it. Here's his report.
The term 'Black Swan Event' entered our lexicon recently, but the idea has been in existence for many years. It has Latin roots, from a phrase that described 'a rare bird in the lands, and very like a black swan'. This was common saying, at a time when black swans had not
been discovered. Upon its discovery in 1697, the black swan ceased to be a impossible thing, and became one which was improbable yet capable of being rationalized and institutionalized after its discovery, as if it should’ve been expected.
Today, the most commonly cited Black Swan Event is 9/11. It was one which was not easily seen or predicted, and considered impossible or at least improbable. Yet, in happening, history has been re-analyzed. Writers have spent a tremendous amount of time reviewing data prior to 9/11 which point to some big event occurring. In doing so, this work makes the event seem not only highly probable, but so likely that it could have been prevented, thereby institutionalizing many aspects of it in new behaviors. Since 9/11, other events have occurred which have been described as 'Black Swans', but may not meet the criteria. As a result, there is a tendency to overemphasize the impact of smaller events by journalists, as the logic of the improbable is sensationalized.
In the upcoming general election, it is sometimes assumed that Obama is a lock to win in 2012. He is definitely facing strong headwinds, but the opposition has not managed to create a message able to undermine the qualities of his personality, refute the claims of his patronage base, or sway the borderline voters who still remain hopeful that the man they thought he was will eventually show himself. The Republicans, whoever their candidate may be, are relying on unhealthy economic conditions to carry them forward. Based on the fact that no president has ever been re-elected with unemployment over 7.5%, it's astounding that Obama continues to have such high approval ratings, showing the depth of his appeal. He is the first post-war (WWII) president to have unemployment exceed 9.0% in the first two years of his presidency, and faces the prospect of having 3 straight years above 9.0%, the first president to do so over any portion of his tenure. Despite the gloom, he has the 'benefit' of blaming this on his predecessor, who had very low approval ratings at the end of his presidency.
The Republicans have a dilemma. If they are unable to craft a message which separates and elevates them above Obama, and if unemployment alone is not enough to undermine Obama's support, what else can they rely on to assist them to victory?
The answer is, a Black Swan Event, or some semblance of one. Perhaps Black Swan is harsh – the essence of the concept is that it should be rare and unexpected. But some more mainstream events are typically labeled 'Black Swans', so that should be the focus. There have been some market crashes which could be termed 'Black Swans', most notably those in 2008, but market crashes are entirely predictable in a broad sense (though hard to time) and therefore cannot fulfill the 'improbable' clause required to make them true Black Swans. For the purposes of discussion, these are included, because events such as these do alter how people view things – and are the real driving force that will impact an election.
To 'predict' a Black Swan, we'll need a list of some events that commonly fit the description. The assassination of Archduke Ferdinand and the outbreak of WWI would be one. The Titanic. Pearl Harbor and the Doolittle Raid on Tokyo. The assassinations of JFK and Martin Luther King. Watergate and the Nixon Pardon. The Iran Hostage crisis. Clinton's Monica Lewinsky trials and travails. 9/11. Less fitting the description are: the 1929 Market Crash and ensuing Depression, the 1987, 1998 and 2008 Market Crashes, the 1991 Recession. Not all are pure 'Black Swans', but each one had an impact on the US or world, altering how we view our society, our economy, the world, or our political system and politicians. There's no need to delve into every one to see how this happened and why, but a few should be looked at in order to gain insight on how they can impact an election.
Black Swan Events can happen before an election cycle, and their lasting effects are likely to have an impact. Watergate and the Nixon Pardon were two very surprising events which, taken in tandem, undermined Ford's opportunity to win in 1976. The 1991 Recession undermined Bush 1. Some that happened during the cycle were the Iran Hostage Crisis, which was Carter's undoing, and the 2008 market crash that ultimately hurt McCain’s chances of winning as he appeared unpresidential versus an engaged Obama. Here in 2011, we're in the election cycle already, so something unexpected or unwanted would have a major impact simply due to timing. But what events? How would they alter outcomes?
Let's review some possibilities.
It's the economy, stupid! But not just the economy; it's really about unemployment remaining over 9.0% and is unwanted, not unexpected. Should the economy continue to muddle along, it may not hurt Obama much more than it already has. Inflation, however, could be the Black Swan. Inflation is already rising, and gold prices indicate much more is expected. The Fed is keeping interest rates low, meaning they are fueling prices through easy money. The concept that 'we have no inflation right now' is a meme common in the media, but incorrect. Using the Consumer Price Index (CPI) as it was designed in the 70's, which had more emphasis on the purchase price of everyday items, inflation is well above 9.0%. Current CPI, which focuses on a broader range of hard goods, has hit an annualized monthly rate of 6.0% several times (.5% July, Feb and March 2011). It is not lost on policymakers that 'Core' inflation includes Food and Energy, items we use everyday, so we have begun to hear inflation reported without these included, to produce a more palatable figure. Shadowstats, which utilizes an economically honest methodology, has annual inflation well over 10.0%. A deflationary economic environment, in which prices are rising, is astounding. This can only be explained by Fed easing of interest rates. With continued easing now promised, if Inflation becomes an issue prior to the election, it will represent a 'Black Swan'. Jesse Jackson’s 'Misery Index' will be resurrected, this time by a Republican.
A terror attack of substantial size is another. What form this would take is difficult to imagine. We can't know whether it would be against the military (as in the USS Cole or Ft. Hood) or the citizen population (9/11 or Bali 2002). In all likelihood, an attack would result in increased military activity that would most benefit a sitting president. It's a chance to look decisive and show action. There is a scenario in which an attack implies the incumbent president was ineffective. But the killing of Bin Laden is a wild card, it's almost certain that Obama will use such an attack to showcase his willingness to 'get tough'. Voters don't like to change presidents at a time when the threat level is high – too many unknowns are in play.
A thwarted large terror attack would truly be a Black Swan, and benefit Obama greatly. Imagine the effect of a massive attack on a public space, say JFK Airport. Now imagine the group perpetrating it being infiltrated, the terrorists arrested, the bombs defused, and people rejoicing at the value of the protection they received. No matter how many people are out of work, most will view their leader as a man of action, courage, and resourcefulness. Those who continue to oppose him would be unpatriotic!
Any scandal – either side could suffer from this – which strikes at the core of a candidacy. Currently, the one which may be most likely is that of Obama's relationship with Solyndra, recipient of millions in Federal support for solar technology. One of Obama's biggest fundraisers is a Solyndra investor, George Kaiser, who introduced Obama to the company, helped set up the government funding, and may have used the loan to get his money out, or at least used some degree of impropriety in directing the 'competitive, non-political' process. Other green companies such as an electric car manufacturer lacking a prototype and gearing their cars toward high-end purchasers (Tesla and Fisker), also received 'non-political' support. To make matters worse, Fisker was making the cars in Finland. Meanwhile, home-grown firms with prototypes geared toward average consumers were overlooked and left to struggle without the value of a high profile political operator.
Are any of these true 'Black Swans'? Not in the academic sense. But each one has the potential to affect the election on some psychological level. Knowing the unknowable and actually predicting a Black Swan would be a stupendous achievement on anyone’s part. One means by which they can be 'Predicted' is to have large groups of people share ideas and scenarios, accepting even more outlandish concepts as 'Possible'. To the extent Black Swans are usually large, unexpected events, none of those described can be truly called 'unexpected', and some aren't even large.
The core point of the Black Swan is its ability to alter how people perceive their world, and how the event impacts their behavior. In an election, the Swan doesn’t have to be completely Black, it just needs shades of Grey for the purposes of manipulation. Perhaps, if readers wish to share their thoughts, we will have someone predict a true Black Swan and Maggie’s Farm will have a big fluffy Black Swan feather in its cap.
